It’s All about Time and Money

Nov 14, 2007

Article By: Scott Burns

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Q: One of the really important things for having a sound retirement plan is the answer to a single question: "How long will I live?" I'm stunned that meaningful information is not available. Yes, I know there are sites where one can enter such information as how many beers you drink, whether you smoke, how fat you are, how you drive your car without the seat belt buckled, and what's your blood pressure.

But I have a variety of medical conditions and can't seem to find any expectancy information. The same goes for my wife -- she's got a medical history. So would I cut her out of an annuity since there is a good chance I'll outlive her? Why am I being forced to act as a doctor? Should I be on a cruise ship with my wife instead of writing e-mails! -- M.K., by e-mail

A: Getting a more accurate expectancy measure wouldn't do much to answer your real question -- how long will you live? Life expectancy only tells us when HALF of all those with similar histories will die. Fifty percent will die earlier (some much earlier), and 50 percent will die later (some much later).

Smoking, for instance, reduces life expectancy quite a bit. About six years by some measures. But there's always the (rare) 90-year-old who will credit his longevity to his daily pack of Camels.

You can get a better idea of what this is all about by downloading the U.S. Life Tables, 2003, recently revised. Google "life expectancy" and look for the Centers for Disease Control listing, which should be first and will lead you to the tables. Open the tables and spend some time with the table for your gender and race.

My favorite is Table B -- "Number of survivors by age, out of 100,000 born alive, by race and sex: United States, 2003." It shows that while nearly 80,000 of 100,000 white men born survive to age 65, their numbers drop by a quarter to 60,634 by age 75, to 29,942 by age 85 and only 5,063 by age 95.

A 25 percent chance you won't live beyond your 75th birthday (from 65) is a pretty good argument for making your list of the top 10 things you want to do, and doing them.

Q: I am 60, and my wife is 56. Our combined earnings are $185,000. We have $170,000 in our 401(k) plans, $200,000 in taxable bonds, $30,000 in company stock, $120,000 in savings, about $35,000 equity in a house valued at $110,000, and about $300,000 in equity on our $600,000 home. We contribute $46,000 a year to our 401(k) plans and owe $5,000 on a credit card. Our cars are paid for. We would like to retire on an income of about $100,000 when I am 66. Do we need to save more? -- C.W., by e-mail

A: This will surprise you, but one of the big factors is your expected Social Security benefits. Since both of you are near-maximum earners, you can expect combined Social Security benefits in excess of $40,000, even assuming that your wife retires at 62 when you retire at 66. Every dollar of Social Security benefits you receive will eliminate the need to have about $25 in investment assets.

This is important if you look at the proportions here. Basically, a $2,000 increase in Social Security benefits will eliminate the need for one year of your current savings -- so we're talking about a very powerful lever.

What to do: Start paying attention to your annual Social Security statement and its annual estimate of your future retirement benefits.

Now let's say that your future benefits will be about $45,000. That leaves you with the need to provide $55,000 from your investments if you are to meet your $100,000 target for retirement income. That, in turn, suggests a nest egg of about $1.375 million if you are to plan a safe withdrawal rate of 4 percent. It's $1.1 million if you are willing to take a bit more risk and withdraw at 5 percent.

This range is your magic number.

If your current nest egg and annual savings of $46,000 grow at 5 percent a year, you'll have a tad over $1 million. If they grow at 8 percent, you'll have about $1.17 million -- a small margin over the lower target.

So you have two things to do. First, increase the amount you save by as much as possible so you'll be closer to reaching the minimum nest egg amount even if your return is only 5 percent. Second, take a close look at your savings as a portfolio and consider changes that would bring your likely return to 8 percent. That will probably require an increase in your allocation to equities.

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